Stocktake of efforts to strengthen governance frameworks to mitigate misconduct risks
This report sets out next steps in the FSB’s work to consider the role governance frameworks have to play in reducing misconduct and includes an international stocktake of activities already underway in this area.
The FSB workplan to reduce misconduct consists of three elements: (i) examining whether reforms to incentives, for instance to governance and compensation structures, are having sufficient effect on reducing misconduct; (ii) improving global standards of conduct in the fixed income, commodities and currency markets; and (iii) reforming major benchmarks. The report published today considers the first of these three issues.
In the aftermath of the financial crisis, authorities and firms sought to strengthen financial institutions’ governance. More recently, a series of high profile misconduct cases in major financial institutions has come to light, focusing attention on the governance of conduct more broadly.
Ethical conduct, and compliance with both the letter and spirit of applicable laws and regulations, is critical to public trust and confidence in the financial system. Misconduct is also relevant to prudential oversight as it can potentially affect the safety and soundness of an individual financial institution and in turn, the financial system more broadly.
The report sets out three areas for further work by the FSB, with a view towards preparing a toolkit for supervisors and firms on:
- Rolling bad apples. This problem arises when employees are dismissed due to misconduct at one firm (or leave under suspicion of misconduct) and then re-surface at another firm. This can be seen as a collective action problem. This work will try to define and size the problem and explore the current and potential uses of governance frameworks to make employee screening and due diligence more effective.
- Responsibility mapping. While many policies set out supervisory expectations for the role and responsibilities of the board and senior management, some authorities have extended this concept to require institutions to identify the responsibility of specific senior individuals. This work will examine the ways in which responsibility mapping and related tools could be used to mitigate misconduct risk, including through supervisory examination or enforcement practices focused on the legal and regulatory requirements applicable to those individuals.
- Culture. The culture of an institution can be a major influence on its governance framework. This work will explore how governance mechanisms, such as escalation processes, training and non-financial incentives, may mitigate misconduct risks posed by the culture of a firm.
As this work develops the FSB will determine whether further steps, such as guidance, would be beneficial. A final report on this work will be published in March 2018.
The report includes detailed summaries of the stocktake of efforts by national authorities, firms, international bodies, and industry associations to strengthen governance frameworks to mitigate misconduct risk, as well as the findings from a literature review on the root causes of misconduct. The stocktake considers a broad range of activities, practices and approaches in supervising and regulating misconduct risk. It highlights a range of governance issues that are necessary to reduce misconduct including culture, board membership and effectiveness, risk management and internal controls plus people management and incentives.